Causes a little panic
On Monday, world oil exchanges had to live with the news that the biggest exporters have come out with messages about reducing production volumes. The planned total reduction in production volumes of three countries – Saudi Arabia, Kuwait and the United Arab Emirates – is 772,000 barrels of oil per day, including the Saudi contribution of 500,000 barrels per day. Iraq has also announced a reduction in oil production by 211,000 barrels per day from May 1 until the end of the year, while Algeria has decided to cut oil production by 48,000 barrels per day. The mentioned reduction in the volume of the five countries may seem very large, but is less than one percent of the global daily consumption.
Despite this, oil prices managed to rise by more than 5% in a few hours at the start of trading on Monday. It is possible that the market participants reacted so sharply because they are worried that the mentioned countries could be followed by others. However, it is likely that the answer to this question will be received in the next few days and either the world will be forced to live with more expensive fuel, or prices will begin to stabilize. Apparently, countries have come to the conclusion that they can earn more by extracting less. However, such a possibility exists only on the condition that prices continue to hold at least at the current level.
Trying to provide
At the same time, a much more plausible hypothesis is that countries’ announcements about reducing mining are due to a completely different reason. It is believed that the real reason for the announcement is an effort to protect against potential overproduction in the market, which could occur with a further slowdown or even a fall in the world economy. It is thought that the oil exporters also understand this well and are currently trying to ensure a higher price level so that the potential reduction in the prices of black gold will not be so painful at the moment when the announcements about the economic problems and the drop in demand will start to be heard. In addition, making a single announcement has a much stronger impact on the market and allows for potentially greater price growth, as market participants rapidly increase their purchase volumes of oil contracts.
Negative trends in world foreign trade are already felt, and this indicates several things. The first of them – less fuel will be needed for transportation. On the other hand, the potential decrease in the volume of world trade indicates a decrease in consumer activity in various countries, therefore the demand for oil may decrease not only in world trade, but also in the domestic markets of countries. This is especially encouraged by the ever-increasing interest rates, which will reduce the overall spending of companies and households. Therefore, there is a possibility that oil will soon return to the decrease in prices observed in previous months, only for oil producers it will be less painful than if the production was not reduced. At the same time, the world does not have to worry about the oil shortage, as current events are conducive to the rise of shale oil production, such as the United States, which has become the global flagship of black gold.
